Private equity views brokers as a reliable source of capital deployment, especially as they are coming through Covid reasonably well. It means consolidators will have money to spend. But where will they turn for purchases in the Covid-hit industry?
Last week, Saxon East examined insurer M&A, pointing to an Allianz and RSA deal as a possibility.
This week he looks at broker M&A.
Ardonagh will soon be back on the acquisition trail following its mega-refinancing last week.
Chief executive David Ross now has £300m additional M&A firepower.
With consolidator Aston Lark also bolstered after its Goldman Sachs refinancing last year, and private equity-backed PIB still making buys, there are now several UK retail giants hunting for deals.
GRP will also be back on the hunt for brokers, as revealed in Insurance Times article here.
MGAs in the frame
Where are the best deals?
Now is a very good time for buying an MGA.
Their capacity was already weakened following the Lloyd’s pull out and a number of MGAs ceased - Pioneer was put into run-off, Vibe followed the same path after being unable to secure paper and Aspen pulled the plug on its MGA.
And now, with so many Covid claims coming from schemes and MGAs, providers will be even more wary of partnering up.
That presents a real opportunity for PIB and Ardonagh to build on their MGA footprint. There could be some excellent deals for small specialist MGAs.
MGAs showing excellence in a particular product area will be key for acquisition buyers.
In the last ten years, the UK market has seen time and time again how generalist MGAs struggle - Thistle, Primary Group and Towergate Underwriting all suffered because they were spread too wide.
Wide underwriting footprints mean an MGA comes up against large blue chip insurers, who have greater scale and capacity for intense pricing.
It also dilutes the service proposition to brokers.
This can lead to worse underwriting results and capacity providers backing away.
A lack of capacity in turn leads to MGAs seeking unrated paper from insurers, which then fall into liquidation, as today’s news of Gefion’s demise shows all too keenly.
So any buyer is likely to focus intensely on the level of specialism and overall sustainability.
Broker landscape unsettled
As for broker deals, the market is waiting to see if Covid will have an impact on pricing.
As well as MGAs, Ardonagh may seek to build on its international broking footprint following the acquisitions of Ireland’s largest broker, Arachas, or opt for more team hires to expand its London market operations.
When will deals pick up? There is hope that by the third quarter the market will begin to settle again.
But even if it takes more time, there is no doubt it will resume with competitive energy.
Brokers are one of the few firms not badly hit by Covid, meaning the allure for private equity will remain as strong as ever and broker M&A will continue to be vibrant.
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